Argentina’s inflation-linked debt extended its drop Friday amid investor concern that the growing burden will prove unsustainable for the government.
Boncer bonds due March 2023 fell 8.1 cents on the peso, while inflation-linked notes due September 20 rose 0.3 cents on the peso after dropping the most on record the previous day. The moves follow investor concern that the government will need to restructure its obligations as inflation-linked debt, which is estimated to make up nearly 80 percent of peso debt, becomes a growing burden. Economists estimate inflation will end the year above 70 percent.
Economy Minister Martín Guzmán said that the government would never stop payments on its local debt in a late TV interview on Thursday and slammed the previous administration for re-profiling local assets. Earlier Thursday, the Central Bank and the fund manager arm of the country’s state-run pension fund purchased inflation-linked assets to curb the sell-off, according to people with direct knowledge of the matter.
The large inflation-linked debt load has led rollover rates to fall in recent Treasury auctions. Investors are concerned that the government would have to take unorthodox steps if it struggles to meet its debt-sale goal, according to Javier Casabal, a fixed income strategist at Adcap, a local brokerage.
Consumer prices are forecast to rise more than 72 percent this year, according to the most recent Central Bank survey of economists.
Simply printing more pesos to pay the debt also squeezes the government, because it risks even higher inflation and would blow past monetary emission targets set by the International Monetary Fund. Argentina is expected to exceed the monetary issuance target of one percent for 2022 set out by its US$44-billion deal with the fund, according to Buenos Aires-based Facimex Valores.
“Minister Guzmán is at a crossroads,” said Alejo Costa, chief Argentina strategist at BTG Pactual in Buenos Aires. “Easing concerns requires a combination of fiscal discipline and the presence of the central bank as a lender of last resort in case rollover disappoints. He does not seem willing to pitch fiscal discipline, and cannot guarantee Central Bank financing if needed due to IMF limits.”
Argentina’s previous government under Mauricio Macri re-profiled the country’s local debt in 2019, and fears of a similar move by a new administration in 2023 are also part of the recent market jitters. While elections are still a year-and-a-half away, President Alberto Fernández’s approval ratings have been sliding as prices soar.
“I don’t think that a restructuring of peso-denominated paper is a done deal, but it will certainly hinge on the credibility generated by the next administration,” said Ramiro Blazquez, head of strategy at Banctrust & Co in Buenos Aires.
by Scott Squires & Ignacio Olivera Doll, Bloomberg